Commerzbank Sets New Targets as Profit Rises

Aug. 7 (Bloomberg) -- Commerzbank AG, Germany’s second-biggest bank, stepped up plans to dump bad assets and said
bad-loan provisions would shrink after its second-quarter
profit more than doubled. The shares rose.

Commerzbank will cut unwanted assets to about 67 billion
euros ($90 billion) by the end of 2016, more than a previous
target of 75 billion euros, the company said in a statement
today. Provisions for bad debt in 2014 will be “well below”
the 2013 level, the bank said.

Commerzbank is expanding lending to German consumers and
companies while winding down soured shipping and real estate
assets as part of an 18.2 billion-euro bailout. Commerzbank’s
finances are under scrutiny by the European Central Bank, which
is reviewing balance sheets of the region’s biggest banks and
conducting stress tests before taking over as their supervisor
in November.

“The targets for non-core assets as well as loan-loss
provisions are positive,” said Neil Smith, an analyst with
Bankhaus Lampe in Dusseldorf, Germany, who recommends investors
hold the shares.

Net income rose to 100 million euros from 40 million euros
a year earlier, the Frankfurt-based lender said. The average of
12 analyst estimates compiled by Bloomberg was for a 127
million-euro profit.

Risky Loans

Commerzbank shares rose as much as 4.5 percent and were 2.3
percent higher at 10.64 euros as of 12:53 p.m. in Frankfurt
trading, valuing the company at about 12.1 billion euros. The
shares are down 9.1 percent this year, while the benchmark
Bloomberg Europe Banks and Financial Services Index fell 3.4
percent in the same period.

Commerzbank said it will cut commercial real estate and
shipping assets at its non-core unit, which bundles holdings set
for sale, to about 20 billion euros by the end of 2016. Public
finance assets will be reduced to about 47 billion euros by the
same time. The bank held 92 billion euros of non-core assets as
of June 30. Previously, Commerzbank didn’t break down targets
for different types of holdings in the unit.

“The low interest rates are leading investors to buy
riskier portfolios, which pushes along the sale of non-core
assets,” Christian Hamann, an analyst at Hamburger Sparkasse
AG, said yesterday.

Operating profit rose to 257 million euros from 74 million
euros a year earlier. The average estimate of 11 analysts was
for 221 million euros. Provisions for risky loans decreased to
257 million euros from 537 million euros a year earlier.

Asset Disposals

Commerzbank said loan-loss provisions in 2014 will be
“well below” the 2013 level. Previously the bank said it
expected loan-loss provisions in 2014 “to be lower than the
total figure for 2013.”

The bank plans to reduce commercial real estate and
shipping assets by letting loans mature and persuading customers
to pay off debt earlier than planned, rather than relying on
large sales, Chief Financial Officer Stephan Engels said in a
conference call with analysts today. “I wouldn’t expect sales
in anywhere close to the sizes that we have seen in Spain and
the U.K., for example,” he added.

Real-Estate Loans

In June this year, Commerzbank said it agreed to sell 5.1
billion euros of commercial real-estate loans in Spain and Japan
and non-performing loans in Portugal, including 1.4 billion
euros of loans that the bank classified as non-performing. The
sale will reduce risk-weighted assets by 3.2 billion euros,
Commerzbank said at the time.

“A lot of the assets they’ve sold were in the higher-risk
block of commercial real estate, so that’s quite encouraging,”
Karl Morris, an analyst with Keefe, Bruyette & Woods, said on
Aug. 5. Morris has an underperform rating on the stock with a
target price of 11.30 euros.

The common equity Tier 1 ratio, a key measure of financial
strength, was 9.4 percent, up from 9 percent at the end of the
first quarter. About 15 basis points of that gain came from
first-half earnings and a small reduction in risk-weighted
assets also helped, Engels, the CFO, said in the conference
call.

Commerzbank expects its CET1 ratio under the full
application of the latest Basel rules to exceed 10 percent by
2016. On the way to that goal, increases probably won’t be
steady, but the ratio is unlikely to fall, Engels said.